Monday, September 22, 2008

I would like to declare a moratorium on excessive use of adjectives to describe the current financial crisis. Why adjectivise (is that a word? If not it should be) when onomatopoeia will suffice?

Zoom! Fzzzt! Eek! Kapow! Kabbloey! Argh!

There, the credit crisis easily explained in one line.

Seriously though, bubbles bursting and credits crunching tend to have one thing in common, and that is the sudden drying up of venture capital as investors reassess their strategies and prioritise towards less risky enterprises. Almost by definition, venture capital investment is a risky endeavour, so it is only natural that in times of crisis, the same investors interested in putting money to support the launch of Pets.com will suddenly think twice and invest in gold.

It is no secret that we have been experiencing a mini dot.com bubble in the last couple of years fuelled by Web 2.0 sites. The success of the likes of Myspace and Facebook has prompted a new generation of entrepreneurs (and the recycled dot.com generation) to try their luck in the market by proposing all sorts of participatory web ideas. Venture capital has been willing to invest in the next Facebook, so technology websites have been springing up like things that sprout up during spring (hence the term I guess). By the end of 2006, venture capitalists had invested $500 million USD is Web 2.0 sites, a figure reputedly doubled by 2007. But the well of investment has stalled in 2008, and I would not be surprised if the figures for the year are depressing for web entrepreneurs (early indications point towards a bad investment year).

The problem with the current bubble is that many of the elements that doomed the first one are still there. Lots of investors go into the market with little or no understanding of the technologies involved, and many entrepreneurs create services that nobody wants, or have such small niche appeal as to make their business models obsolete within three months. Moreover, there is little understanding of how these technologies work. Services like Flickr, Digg, and Facebook do not respond to any rational rules of design or sound business model, they simply succeed by an almost serendipitous accumulation of links. Early comers are well placed to accumulate more incoming links early in the game, and then they coalesce into market leaders almost overnight when numbers reach a certain indeterminable tipping point. This basic understanding of networks would be a good tool for investors.

Another common element with the dot.com bubble is that there is a lot of gibberish and technobabble being passed off as sound business models. By using some essential buzz words, the new crop of entrepreneurs want to make it seem as if they have a grasp of the market, when in fact they are just as clueless about it as the rest of us. Last year's buzzword was "social network", but as the leaders established their dominance, other opportunities needed to be found. This year's buzzwords are "local" and "recommendation site". Yes, some people are just realising that Amazon's recommendation system really works, so they want to incorporate the same thing to their sites. The latest trend seems to be to launch a plethora of services that know where you are, tell you if your friends have been there, and recommend them to you. In other words, a thousand ships launched on the premise of the iPhone! Two words for you. Free apps. Social localised recommendations already exist (Panoramino and Google Earth anyone?), and they will reach their zenith when augmented reality comes our way, but social recommendations are driven by free community social tagging, not by proprietary services.

Moreover, the almost religious optimism of some of the players is breathtaking. I was listening to an interview with Brent Hoberman (of Lastminute.com fame) in the excellent Guardian Tech Weekly podcast, and I was struck by the almost Kool-Aid-drinking quality of some of the statements, such as the admonition that "some of the businesses that failed in 2000 are about to work this time around". Translation: we failed before, but give us more money, and this time we will succeed, even though we are using the exact same faulty business plans and basic misunderstanding of how the web works.

I know that I am just adding my voice to the grumpy technophobes that have been heralding the demise of Web 2.0 since last year, but what the heck. Although I think that Web 2.0 is here to stay, there will be a crash (or maybe even a fizzle), just like back in 2000. Few winners will survive, the rest will go the way of Kozmo.com and their ilk.